Amazon Web Services: the 800 pound gorilla that could be worth more than $3T

Jul. 02, 2022 10:05 AM ETAmazon.com, Inc. (AMZN)MSFT, GOOG, GOOGLBy: Chris Ciaccia, SA News Editor46 Comments

Amazon (NASDAQ:AMZN) Web Services is the 800 pound gorilla when it comes to cloud computing, holding nearly 33% of the high-growth cloud infrastructure space, according to Synergy Research Group.

But with the massive Amazon (AMZN) unit continuing to grow at a healthy clip, investment firm Redburn believes "we are just seeing the tip of the iceberg" when it comes to how big AWS can get, potentially making it worth $3T, or more than three times what all of Amazon is worth today.

Analysts Alex Haissl and Nikki Shah, who have a buy rating on Amazon (AMZN) and a $270 per-share price target, note that AWS has more than 200 products, all of which are necessary to transform Amazon. And though AWS is still more weighted -- in terms of revenue -- to older products and technologies, like databases -- its ecosystem, along with the ecosystems of Microsoft (MSFT) Azure, Google (GOOG) (GOOGL) Cloud Platform have continued to aid modern technologies and architectures, especially for storage, deemed the most important service.

Putting a $3T valuation on AWS is sure to raise eyebrows, especially in this market, but the analysts believe there is a "clear path" towards getting there, given the fact a lot of advanced services in its portfolio are not used at all.

The most valuable service in AWS's portfolio is S3, which allows Amazon to provide object storage through a web service interface, as the analysts believe S3 is worth $1.5T alone.

The analysts note that S3 stores more than 100T (yes, 100 trillion) objects and accounts for more than 20% of AWS's sales and is expected to grow to 46% by 2030. The key here is to continue driving volume growth and higher take rates for other storage-associated services.

But Amazon's (AMZN) AWS has several other drivers going for it, including big data processing and machine learning. Examples include Amazon SageMaker, which is used as a machine learning platform; Amazon EMR for big data processing; AWS Glue for data integration; Amazon Redshift for data warehouse; and lastly, Amazon Athena for interactive query service.

Combined with S3 and other building blocks such as databases, these are seen as the main drivers for AWS's growth, which all feeds into a funnel that makes AWS the predominant player in the space from a cost and technology perspective.

Even though AWS has been around for more than 15 years, it's still growing at more than 30%, albeit somewhat slower than Microsoft's (MSFT) Azure and Google (GOOG) (GOOGL) Cloud Platform. Nonetheless, it has an annual revenue run rate of more than $80B and though analysts expect it to have slowing growth in the future, Haissl and Shah believe "high growth" can actually be sustained longer than the market thinks, due to storage and newer technologies taking the lead.

AWS has its own customized hardware -- including the Gravitron processor, the Nitro system and the EFA -- and intelligent software solutions, which has enabled it to provide cost savings to its customers.
Due to continued cost savings and emerging new technologies, the analysts expect that AWS, which had a market share in databases of less than 2% in 2014 to be more than 40% by 2030, due in large part because of the shift to the cloud, moving towards nonrelational databases and new technologies.
With all the hype surrounding the cloud, including Redburn suggesting that Microsoft's (MSFT) Azure is worth $1T, the firm clearly believes that Amazon (AMZN) Web Services is the "best positioned" in the space and has technological advantages over the other key players.
Amazon (AMZN) investors are likely to benefit from the continued upside in AWS one way or another and if the speculation that Amazon splits off AWS comes to fruition, that $3T valuation may be realized sooner than later.
Investment firm Jefferies expects Amazon (AMZN) Prime Day, held between July 12 and July 13, to be a blockbuster sales event for the company.

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